Bidding Farewell to the Recession

MICHAEL HARTNETT, THE RECENTLY APPOINTED chief global-equity strategist at Banc of America Securities-Merrill Lynch Research, has come out swinging. "The recession is over," proclaimed the headline of a research note he co-wrote last month.

Hartnett, whose world view has been shaped by stints working in the U.K. and Japan as well as the U.S., doesn't expect a booming recovery, however. He noted that "the global recovery is likely to be slow, and require sustained policy help."

Hartnett, 42, maintains that the best opportunities in equities are value plays in the developed markets, including mega-cap U.S. companies, as well as growth stocks in the emerging markets. Hartnett also favors high-quality bonds. Investors are hoarding too much cash, he warns. Barron's caught up with him recently in New York.

Barron's: Why do you think the recession is over?

Hartnett: Asset markets and the economic data are telling you that. You have seen a meaningful bounce in equity markets. You have seen a meaningful bounce in credit markets. And you have seen a meaningful bounce in a number of key economic numbers, including business confidence and leading indicators such as manufacturing PMIs—the purchasing manager indexes. And, increasingly, if you look around the world, some of the consumer numbers and labor-market numbers are starting to improve.

What are your thoughts about the impact of unemployment, which is widely expected to increase in the U.S. before it starts to improve?

The unemployment rate and the payroll numbers are lagging indicators, and they have to improve. Over the last year, on average, roughly 12,000 people per day lost their jobs in the U.S. If that continues, there is a great risk that the economy relapses again. So you certainly need to see the traditional labor-market statistics improve. But initial unemployment claims, which are thought to be more forward-looking, have certainly started to improve.

What do you think is driving the recovery?

If you looked at the turning point for emerging markets, it was November, around about the time that the Chinese announced this enormous fiscal stimulus. If you look at the turning point for the Standard&Poor's 500, the dollar and risk assets, it was early March. In fact, it was around the time the Bank of England announced its quantitative-easing program. So the genesis of the recovery in asset prices has been in monetary, fiscal and financial policies, and these polices are working very hard to get a recovery.

Why do you think a slower recovery would be more beneficial?

The slower the recovery is, and the more fragile a recovery it is, the more unpopular the politicians will be during that recovery, and the more likely it is that the existing policy stimulus remains in place—and therefore investors don't have to worry about an exit strategy. As long as the economy is moving in an upward, rather than a downward, direction, it is positive for asset prices.

What about consumers, many of whom are trying to repair their savings?

The biggest push-back to our view that the recession is over is the U.S. labor market and the U.S. savings rate. Undoubtedly, there is a different future for the U.S. consumer compared to the past. And with the means the consumer has to spend, it is going to be very tough to go back to the old growth rates and, more important, to sustain those growth rates.

But given the magnitude of the adjustments that we had in consumption, which was in line with the magnitude of the bear market, going forward it is possible that spending rises rather than falls. U.S. retail sales were running at about $340 billion annually in the middle of last year, and then they collapsed in the second half of the year to around $300 billion—a 12% drop, which is unprecedented. Normally, for the consumer to adjust at that speed, there's a war, a famine or an earthquake.